By making a comparison between factors that foster the financial development of ASEAN-5 and Vietnam, it suggests that both the two sides share common characteristics including: financial
Trang 160
The development of financial systems of ASEAN-5
and Vietnam: A comparative analysis
Nguyen Phu Ha*
Faculty of Finance and Banking,University of Economics and Business, Vietnam National University, Hanoi, 144 Xuan Thuy, Cau Giay, Hanoi, Vietnam
Received 5 October 2010
Abstract This paper looks at the development of the financial systems of ASEAN-5 countries and
Vietnam By making a comparison between factors that foster the financial development of
ASEAN-5 and Vietnam, it suggests that both the two sides share common characteristics
including: financial repression, bank based development, accelerating liberalization of the
financial sector, capital movement, inefficiency, due to lack of competition, effective governance,
and managerial freedom The health of financial system of the ASEAN-5 has improved
substantially during the period post 1997-98, with increase in foreign ownership, movement into
business line, suitable adjustment for financial deepening and broadening On the Vietnamese side,
it shows rapid changes in the financial sectors with existence of capital market and financial
resources as well as risks, resulting from the reforms and international integration Contrasting the
financial development of the two sides, this paper finds that ASEAN-5 is implementing a more
stable strategies and moving towards a more balanced financial structure, while Vietnam is taking
step by step restructuring and developing its out of date banking sector; as well as supporting for
the stock and bond markets For both Vietnam and ASEAN-5, the banking system and capital
market have a large room for further development
During the last few decades, the economies
of East Asia have been growing quickly that
shaped the modern ways of life No other
region in the world was able to achieve such an
extensive economic growth in such a short
period of time ASEAN-5(1), a major group
belonging to East Asia, is integral part of the
success story that followed import-substitution
industrialization “ISI”-policy before switching
* Tel: 84-01695364308
E-mail: phuha@vnu.edu.vn
(1)
ASEAN-5 is the abbreviation term, which stands for the
five economies in ASEAN including Indonesia, Malaysia,
the Philippines, Singapore, and Thailand.
to an export-oriented industrialization “EOI”-policy Belonging to ASEAN group, Vietnam (that became a full member of ASEAN in 1995)
is a small economy with a modest economic scale
in comparison to those of ASEAN-5 Vietnamese
government officially launched its Doimoi
(Renovation) process in 1986, but only started a
radical and comprehensive reform package aimed
at the economic development since 1989 Though Vietnam built up the market economy rather slowly than ASEAN-5, its recent fundamental achievements have proved that Vietnam has step
by step narrowed the stance with ASEAN-5 After eleven years of negotiation for accession, Vietnam eventually got the nod from the World Trade Organization “WTO” in November 2006
Trang 2In spite of recent achievements, the
development of the financial system in
ASEAN-5 countries in general and in Vietnam
in particular, to some extent, could not keep up
with economic growth, their fragile and weak
financial systems have been affected by the
globalization of capital markets and this turmoil
has highlighted the inherent problems of
ASEAN-5 Aware of this problem, both
ASEAN-5 and Vietnam have striven to develop
their financial systems while trying to maintain
financial stability and sustained economic
development This is also the reason for the
paper trying to make a comparison of
ASEAN-5’s and Vietnamese financial systems, thereby
identifies some similar experiences and
different challenges The financial reforms have
progressed much further in ASEAN-5 than in
Vietnam On the way to integrate the financial
system into the region and the world, Vietnam
should consider ASEAN-5 countries as the
navigators and learn the lessons from the
ASEAN-5 The paper also explores that on the
way to integrate the domestic financial market
into the international one, Vietnam can evaluate
herself the current level of the financial deepening
and liberalization, and how is efficient the
Vietnamese financial system in comparison with
ASEAN-5 level, thereby having policy
recommendations for sustained development
The paper is divided into four major
sections Section II briefly takes the bird’s eye
view of the common characteristics of the
general consensus about the development
patterns and characteristics of the financial
systems in ASEAN-5 in the period before the
1997/98 financial crisis Section III analyzes in
a greater detail on the economic fundamentals
and the financial sector development of
ASEAN-5 and Vietnam following the
restructured reform process Then, section IV
reviews and summarizes the major findings
about the similarities and differences in the
process of reforming the financial system of
ASEAN-5 and Vietnam, thereby makes some
evaluation on the stage of financial development
of Vietnam in comparison to those of ASEAN-5
and draws about some recommendations for Vietnam to sustaining high economic growth and sound financial development
2 ASEAN-5 and Vietnam: An overview of unique patterns of financial development
Although it is difficult to come to the definite answers, background information and previous studies (especially on periods before the 1997/98 financial crisis) have found that the development patterns of the banking system of ASEAN-5 and Vietnam share several key characteristics including: financial repression, bank-based development, accelerating liberalization of the financial sector and capital movement, inefficiency and lack of international competitiveness
First, financial repression often refers to the limits on interest rates and entry and obligatory lending to policy - preferred sectors and projects As White 1995 suggests that financial repression was an adjunct to the nationalistic import-substitution policy with which they began their post-war independence in
ASEAN-5 In the economy of Vietnam, the financial sector was totally repressed or subsumed in fiscal policy and preferred state owned sectors for industrialization Financial repression may have made some constructive contribution such
as overcoming market failures in the early period of development when information infrastructure was weak However, the adverse effects of financial repression, such as misallocating resources and suppressing domestic savings are usually extremely strong even in the early period of industrialization, especially if bureaucracy is neither efficient nor clean Under the financial repression, the informal financial sector of either ASEAN-5 or Vietnam has gradually emerged to complement the inflexible formal sector while small and medium-sized firms belonging to private sector do not have enough access to bank finance, and tending
to rely on informal finance (Masuyama, 1999) Besides financial repression, the bank- based financial system has become the debating
Trang 3point of development pattern Observation from
the fact indicates that the banking system often
developed first, and then the money market and
capital market were introduced gradually as a
supplement to the banking system both in
ASEAN-5 and Vietnam Indeed, in the ASEAN
as a whole, most financial systems are
considered as bank-based system, which is
dominated by banks, and the money and capital
market have just become more important since
the 1990s ( for the case of ASEAN-5) and since
2000s (for the case of Vietnam) Bank- based
financial systems suffer several weaknesses as a
result of the dominance of banking When
businesses are mainly obligated to creditors
rather than equity holders, they are less able to
withstand fluctuation in asset prices and
economic conditions Despite the rapid
expansion of equity markets in ASEAN-5 in the
1990s, bonds markets are still underdeveloped
As (Masuyama, 1999) pointed out, ASEAN-5 suffered a dearth of long-term finance capabilities as a result of the long-standing bias
of financial systems toward banking Typically, banks are reluctant to take on the additional risk
of long-term lending where information is insufficient and enforcement infrastructure is inadequate The relative lack of long-term finance alternatives has resulted in term mismatches in the balance sheets of corporations and financial institutions throughout ASEAN-5 Moreover, financial systems in which banks predominate are less inclined to finance venture enterprises that have
no credit history, resulting to small and medium sized enterprises usually do not have access to capital market financing
Table 1: Economic Size, GDP growth, Inflation, Investment, and Current Account
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 average
20.8 24.7 26.9 27.2 28.7 31.2 32.5 35.1 39.6 45.5 52.9 60.9 71.1 89.8 89.2 45.1
128.27 142.399 134.12 87.918 103.29 110.13 105.2 117.7 132.1 147.94 164 196.99 235.17 271.55 256.49 155.5
GDP(bilUS$
)
Vietnam(1)
ASEAN-5(2)
(1)/(2)yearly 0.16 0.17 0.20 0.31 0.28 0.28 0.31 0.30 0.30 0.31 0.32 0.31 0.30 0.33 0.35 0.3 GDPper capital (US$)
288.9 337.5 361.9 360.9 374.7 401.6 413.3 440.2 489.0 554.1 636.1 721.9 835.3 1040.4 1019.0 551.7
6669.6 7111.57 6959.6 5508 5631.1 6155.7 5617 5831 6274.2 7185.1 7769 8745.6 10126 11068 10511 7410.9
Vietnam (3)
AEAN-5
(3)/(4)yearly
0.04 0.05 0.05 0.07 0.07 0.07 0.07 0.08 0.08 0.08 0.08 0.08 0.08 0.09 0.10 0.1
GDP growth (%)
9.5 9.3 8.2 5.8 4.8 6.8 6.9 7.1 7.3 7.8 8.4 8.2 8.5 6.2 3.3 7.2
Vietnam
AEAN-5
8.0 7.5 4.8 -6.6 4.4 7.0 1.1 4.8 5.3 6.8 5.6 6.1 6.5 3.8 -3.5 4.1
Inflation (%)
Vietnam 16.9 5.6 3.1 8.1 4.1 -1.8 -0.3 4.1 3.3 9.4 8.4 7.5 8.3 23.1 6.0 7.1
AEAN-5 5.7 5.4 4.5 16.2 6.0 2.4 4.5 3.4 2.7 3.6 5.2 5.7 3.0 7.3 2.2 5.2
Share of GDP
(current price)
Agriculture, cur
Vietnam 27.18 27.76 25.77 25.78 25.43 24.53 23.24 23.03 22.54 21.81 21.02 20.40 20.89 21.30 23.6
ASEAN-5 12.28 11.73 11.14 11.85 11.43 9.86 9.58 9.85 9.99 9.91 9.34 9.29 9.14 9.19 10.5
Manufacturing,
cur
Vietnam 14.99 15.18 16.48 17.15 17.69 18.56 19.78 20.58 20.45 20.34 20.67 21.29 22.30 22.60 19.1
ASEAN-5 25.62 25.91 26.02 25.88 26.80 28.39 27.74 28.03 28.28 28.66 28.71 29.01 29.11 29.30 27.4
Finance, cur
Vietnam 2.01 1.89 1.74 1.74 1.87 1.84 1.82 1.82 1.77 1.78 1.80 1.81 1.83 1.86 1.8
AEAN-5 11.09 11.52 11.96 11.50 10.75 10.39 10.90 10.87 10.59 10.15 10.22 10.29 10.33 10.08 10.9
Total investment
Vietnam 25.42 26.32 26.70 27.02 25.70 27.65 29.15 31.14 33.35 33.25 33.13 - 29.0
ASEAN-5 33.81 34.98 33.72 26.73 23.30 23.83 23.10 21.69 21.31 21.58 21.53 21.44 25.6
Note: All data of 2009 in this paper are estimates
Source: IMF(World Economic Outlook Database 2009), BIS, and the author’s calculations
Trang 4As for the financial liberalization, it was
introduced gradually and accelerated with the
general shift of economic policies towards
deregulation and liberalization with the
development of capital markets, particularly
stock markets over time Throughout
ASEAN-5, governments have move to phase out credit
allocation, to liberalize interest rates, loan
portfolio, business lines, and market entry
including entry by foreign institutions, and to
develop and reform securities markets Among
ASEAN-5, the Philippines were the navigator
by removing its interest ceilings in 1949 The
same process was carried out in Malaysia in 1973
Following is Indonesia and Thailand, these
countries began to liberalize its interest while the
government of Vietnam adopted to liberalize the
deposit rate first and then the loan rates
Other similarities, such as institution
building relating to strengthening prudential
regulation and financial supervision, become
the necessary counterpart to financial
liberalization in order to avoid market failure
However, the progress of institution building in
ASEAN-5 has generally lagged behind
financial liberalization, a situation that has
contributed to a number of financial crises in
the region, including recent global crisis Lack
of transparency is partly the legacy of financial
regression when governments exercised a high
degree of discretion over management of the
financial sector and it is also partly attributable
to the region’s relationship-oriented business
practices Commercial banks that had strong
government connections were often perceived
to have implicit guarantees that they would not
be allowed to fail The lending practices of
state-owned commercial banks in Vietnam are
example of these consequences (Herve, 2008)
On the other hand, literature also found that
the accounting system of ASEAN-5 and
Vietnam is not up to internationally accepted
standards Most ASEAN-5 members and
Vietnam used to undergo their colonial
histories; Malaysia and Singapore inherited
accounting systems bases on a British model,
while the Philippines based on Anglo-American
model The structural weaknesses in Indonesia’s legal and accounting systems have resulted in poor implementation and enforcement of prudential rules and regulations The legal and accounting systems designed to function in Vietnam’s planed economy are in need of total overhaul as that country attempts
to transform its economy based on market principles There is also weak governance behind an underdeveloped institution structure
In some ASEAN-5 economies, official corruption in organizations such as central banks resulted in inadequate supervision Undisciplined financial institutions can lead to adverse selection, of misallocation of resources, and bad corporate governance which in turn leads to inefficient corporations In Vietnam, non-arm’s length lending by state-owned commercial banks to state-owned enterprises has undermined corporate governance
In sum, with the exception of Singapore, the financial development of ASEAN-5 in general and Vietnam in particular are generally inefficient because they lack competition, effective governance, and managerial freedom, mainly due
to excessive restrictions and inadequate regulation and supervision Inefficient financial systems misallocate the increased inflow of capital attracted
by financial and capital liberalization and uncompetitive domestic institutions succumb in the face of increased entry of foreign financial institutions, threatening financial stability This poses a difficult policy question because, while financial liberalization is necessary in order to improve the efficiency of a financial system, rapid liberalization may undermine the stability of that system
3 ASEAN-5 and Vietnam: Recent economics fundamentals and financial sector development (1)
(1) Financial development can be defined in several ways
In fact, financial systems can develop in terms of size but also in terms of the efficiency in which they intermediate funds Financial development in terms of size (financial
Trang 5Turning to the factors that foster financial
development, the literature concentrated first on
macroeconomic ones, i.e GDP growth rate,
inflation, GDP per capital, and some legal and
regulatory system of financial institutions, as
well as the structure and functioning of the
financial system itself Some researchers also
found that for the economies in transition, the
external financial liberalization and particularly
that of the capital account strongly contributes
to the development of the financial sector in the
long run (IMF,2000; Bailliu, 2000)
3.1 Movement of the Major Macroeconomic
Variables
While ASEAN-5 has recorded quite high
economic growth over nearly 15 years from
1995 to 2009, averaging 4.1% per annum,
(excluding the negative 6.6% in the year 1998
and negative 3.5% in the year 2009 as expected
due to the regional and global financial crisis,
respectively), Vietnam has even achieved much
depth) is typically measured by the size of total financial
assets (the sum of commercial bank liquid assets, stock
market capitalization, and bond market capitalization) in
relation to gross domestic product (GDP) Differently
from financial depth, financial efficiency is hard to
measure for the financial system as a whole For the
banking sector, the common used measures are the
profitability indicators such as economic efficiency
relative to bank assets (ROA), and the capital efficiency
relative to bank equity (ROE) Besides, asset quality (as
measured through non-performing loan ratios); and
Capital Cushions (as measured by the Basel I ratios of
regulatory capital to risk-weighted assets and the ratio of
market capital to risk-adjusted assets) could reflect the
financial position of banks As regards the capital
markets, the most readably available measure of efficiency
is turnover, which gives the values of stock transactions
relative to the size of the financial market (Gallego,
Herrero, and Saurina 2002) Besides, financial
development is somewhat reflected by financial
broadening, which refers to the tendency for diversify or
broaden structure of the total financial assets (Ghosh,
2006) Financial broadening is usually assessed through
changes in the relative size of bank and capital market
assets as financial systems evolve from predominantly
bank-based financial intermediation to capital market
finance, capital market assets tend to increase in relative
importance.
higher economic growth with the average rate
of 7.2% during the period 1995-2009 (Table 1) Accompanying with such a high growth rate, GDP per capital of Vietnam gradually rose yearly from $288USD in 1995 to about
$1019USD in 2009 There was a signal factor that allowed Vietnam to overcome the status of
a poor country in the coming years Despite the GDP per capital of Vietnam has improved substantially during the period, it has been very small (around 10.26%) as compared to that of ASEAN-5 Besides, the structure of the economy of both ASEAN-5 and Vietnam has changed towards industrialization It could be seen that the share of manufacturing of ASEAN-5 on average is still higher than that of Vietnam While the share of manufacturing in the GDP of Vietnam increased from 14.99% in
1995 to 22.60% in 2008, accounting for 19.1%
in the GDP, that of ASEAN-5 has increased at a lower speech but accounting for 27.1% As for the contribution of the financial sector in relation
to the GDP, there has been an upward trend in ASEAN-5 along with the high economic growth rate and the improvement of economic structures during 1995-2009 In Vietnam, the contribution
by the financial sector to the GDP was very modest with the average of 1.8% from 1995 to
2007 (Table 1) Table 1 also suggests that either ASEAN-5 or Vietnam have been successful in combating inflation; there were, however, inflation has emerged as a major concern in Vietnam since 2005 After a spike in 2005-2007, inflation began moderating progressively and consequently reached the highest level of 23.1 %
in 2008 The rather high economic growth corresponded with a significant increase in total investment (Table 1) though its ratio to GDP has tended to decline since 2000 However, it has been playing an essential role and has consistently contributed to the economic development in the region
3 2 Development of the financial system Key policy reforms
Trang 6In the ten years since the 1997-98 financial
crisis, the financial systems in ASEAN-5 have
restructured significantly, and the relative
importance of structural reforms has varied
across economies and over time In the
most-affected crisis economies like Indonesia,
Thailand, and Malaysia, a number of financial
institutions (banks and non-banks) were closed
or merged with healthier institutions; official
and private asset management companies were
established or strengthened to assist in the
resolution of impaired assets; and official and
private capital was injected into the banking
sector Even though it did not experience a
banking crisis, Vietnam has also undertaken
substantial restructuring during the years after
the regional crisis During 1999-2001, a round
of restructuring and mergers, particularly
over-competition among joint stock commercial
banks (JSCBs), took place that makes the
banking market to be more open The largest
state owned commercial banks (SOCBs), which
had been highly protected, have been under
restructuring and privatization As a result, the
number of the JSCBs fell from 51 to 34 by
2008 Since 2005, some JSCBs and SOCBs
have been listed on the stock market It can be seen that both ASEAN-5 and Vietnam have undergone the closures, especially of smaller institutions, as well as mergers and acquisition after the regional crisis; the economies of ASEAN-5 and Vietnam, however, pursued different strategies behind their reform process for development In the case of ASEAN-5, this has been a response to long-standing weaknesses in its banking system and management But in the case of Vietnam, it has followed the international integration and commitments to financial services liberalization associated with WTO entry, that Vietnam must renovate its non-market economy, allowing the market to competition from either foreign players or JSCBs It was subjected to the relevant laws and regulations as promulgated
by the competent authorities of Vietnam to ensure consistency with Article VI of the GATS and Para 2(a) of the Annex on Financial Services Within the ASEAN-5, most economies have adopted Master Action Plan (MAPs) directed at financial sector strengthening and reform (mainly the official sector) during the last ten years (Charles,2008) uio
Figure 1: Private sector loans to total deposits (%)
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
Source: IMF and WB Q2-2008 2005-2007
Figure 2: Financial Deepening (% of GDP)
0 20 40 60 80
19 19 1997 98 99 0020 20 20 20 20 20 20 20
Source: National Data Source, International Monetary
Fund.
yi
The problem of financial repression, which
was regarded as rather serious both in
ASEAN-5 and Vietnam, has been step by step alleviated
It was reflected in Figure 1 by the ratio of
private sector loan to deposit, inwhich Vietnam ranks the first as compared to ASEAN-5 Private sector loans to total deposit not only explains credit strength in recent years but also
Trang 7proves a risky signal when the economic
performance of other sectors goes down (as the
consequences of crises), affecting the economic
performance of the banking sectors Structural
changes in the banking system can also be
proved by the movement of banking institutions
into investment banking-type activities
Traditionally, banks in both ASEAN-5 and
Vietnam have concentrated on the core business
of providing relatively illiquid loans to
businesses and households, financed by liquid
deposit liabilities Even though this role
remains dominant in regional banking systems,
a decade of long restructured reforms have seen
an increasing number of bank moving into investment-banking and related activities Table
2 depicts the ratio of the securities investment
to total bank assets In particular, Indonesia and Philippines banking system hold relatively high ratios of securities investments in relation to total assets The increasing trend has been continuing until 2008 in ASEAN-5 The data also shows that the similar tendency happens to Vietnam when the securities investment to total bank asset went up from 4.2% in 2006 up to 16.3% in 2007 before reduced to 12.4% in 2008
fh
Table 2: Securities Investment to Total Bank Assets of Commercial Banks (%)
Source: CEIC; National sources; and Global financial stability report, International monetary fund
hk
Financial deepening and broadening
While similarities have been found, a brief
comparison of the degree of financial
development in ASEAN-5 and Vietnam will
now be conducted Figure 2 indicates that
financial deepening(2) in ASEAN-5 and
(2)
As far as the development of financial scale is
concerned, the ASEAN-5 financial systems were about ten
times as large, with the total financial assets of 80% of
GDP on average In Vietnam, financial depth has been a
rather shallow with the underdeveloped financial market
in comparison to those of ASEAN-5; and the bond and
stock market capitalizations have just made up only about
one tenth those of ASEAN-5 (Figure 2,3&4) However,
since the new millennium, especially since 2004, the fast
growing domestic credit with an annualized average of
33.4% and the commercial financial assets to GDP of
nearly 99% in 2008 (increasing from 20% in 1996) have
promoted financial deepening in Vietnam During this
period, there were also sharp increases in the growth of
money supply (M1 and M2 that are reflected in Figure
6&7) Moreover, this movement has been fueled by
the short booming of both the stock and the bond
markets in 2006 and 2007 As the result, the
Vietnam has changed significantly over time In Vietnam, financial depth was very low before
1998, averaging about 22% of GDP and exclusively concentrated in the banking system Financial deepening was just shortly improved after 1998 before going to be stalled during 2000-2005 As shown in the second section, both ASEAN-5 and Vietnamese financial systems have traditionally been predominantly bank-based, and not market-based one In ASEAN-5 countries, it has been characterized
by the so-called “normal process” as the differentiation began to blur, first with the expansion of domestic bond markets in the second half of 1990s (Figure 3), and the second with the stock market boom of the early 1990s (Figure 4), while the commercial bank liquid assets to GDP has been rather stable at a high rate of around 80% of GDP (Figure 5)
financial depth in Vietnam has been improved significantly and gone in line with that of ASEAN-5
Trang 8As far as the development of financial scale
is concerned, the ASEAN-5 financial systems
were about ten times as large, with the total
financial assets of 80% of GDP on average In
Vietnam, financial depth has been a rather
shallow with the underdeveloped financial
market in comparison to those of ASEAN-5;
and the bond and stock market capitalizations
have just made up only about one tenth those of
ASEAN-5 (Figure 2,3&4) However, since the
new millennium, especially since 2004, the fast
growing domestic credit with an annualized
average of 33.4% and the commercial financial assets to GDP of nearly 99% in 2008 (increasing from 20% in 1996) have promoted financial deepening in Vietnam During this period, there were also sharp increases in the growth of money supply (M1 and M2 that are reflected in Figure 6&7) Moreover, this movement has been fueled by the short booming
of both the stock and the bond markets in 2006 and 2007 As the result, the financial depth in Vietnam has been improved significantly and gone in line with that of ASEAN-5
O;
Figure 3: Bond m arket capitalization (% of
GDP)
0
20
40
60
19951996199719981999200020012002200320042005200620072008
Source: IMF, Hanoi Office; International Financial
Statistics (IMF) and The World Bank
Figure 4: Stock m arket capitalization (% of
GDP)
-50 0 50 100 150
19 19 19 19 19 20 20 20 20 20 20 20 20 20
Source: IMF and The World Bank ASEAN-5 Vietnam
Figure 5: Commercial Bank Liquid Assets
(% of GDP)
0
20
40
60
80
100
120
19 19 19 19 19 20 20 20 20 20 20 20 20 20
Source: Int ernational Financial Statist ics (IMF) and T he World Bank.
Figure 6: Grow th of Domestic Credits to the
economy (compared to one year previous, %)
0 50 100
19951996199719981999200020012002200320042005200620072008
Souce: National Data Souce, International Monetary Fund
(IMF)
Trang 9Figure 7:Grow th of Money Supply: Broad
Money (com pared to one year previous, %)
0
20
40
60
80
1995199619971998199 92000200120022003200 4200520062007200 8
Source: National Data Souce, International Monetary
Fund
Figure 8: Financial Sector Broadening Inde x
0 100 200 300
19951996199719981999200020012002200320042005200620072008
Source: International Financial Statistics (IMF) and T he World
Bank
‘ ;l
In addition, we can see from figure 6 and 7
that the growing of money supply in ASEAN-5
has been maintained at a rather stable ratio
(about 12%) after 2000 while the evolution of
money supply growth in Vietnam has been very
complicated since 1995 (that reached 52% for
M1 growth and about 68% for M2 in 1999 and
was very high during 2003-2004 due to that
fuelled inflation during these periods)
Financial broadening has occurred in both
ASEAN-5 and Vietnam as reflected in Figure 8
It suggests that the ratio of capital market assets
(including stock and bond market asset) to
banking sector assets has increased over time in
Vietnam while it has been adjusted at a rather
stable level in ASEAN-5 For the most part,
financial sector deepening and broadening have
move together in ASEAN-5 However, a slight
negative relationship could be identified
between financial depth of Vietnam and of ASEAN-5, particularly since 2002 It has been subject to occasional fluctuations relative to trend, related to the business cycle and financial booms and busts
soundness
As regard financial efficiency, the credit market and the capital market will be analyzed separately due to the lack of global indicators Regarding economic efficiency of commercial banks, we can see from Table 3a that the rate of return (ROA) has shown improvements in ASEAN-5, averaging 0.98% in the period 2000-2004, reaching 1.68% in 2004 and 1.44%
in 2007 In Vietnam, ROA was just slightly below the average level of ASEAN-5 at rate of 1.31% in the period 2006-2008
Table 3a: Rate of Return on Commercial Bank Assets (% per annum)
J
Source: CEIC; National sources; and Global financial stability report, International monetary fund.
Trang 10Meanwhile, Table 3b shows the rate of
return on equity (ROE) of commercial banks It
is clear that the capital efficiency has been
increasing in ASEAN-5 from 10.7% on average
in the period 2000-2004 to above 13% during
2004-2008 The capital efficiency seems
slightly higher than that of Vietnam at around
11.4% in 2006 and 12.6% in 2007 (Table 3b)
After the 1997/98 financial crisis, the banking
industry of ASEAN-5 has significantly
developed its financial strength by cleaning up
banks’ balance sheets and increasing capital
through issuing new stocks as well as
increasing financial reserves As a result, the
financial position of banks has improved
significantly in terms of non-performing loans
(NPLs) and capital adequacy (see Table 4 and
5) For example, the NPLs of ASEAN-5 were
reduced from 10.62% in the period 2000-2004
to about 4.88% in 2006 and about 3.58% in
2007 In Vietnam, the NPLs of banks have been controlled efficiently from the high level of 13% in the period 2000-2004 to about 3% in
2007 Moreover, the period since the crisis has seen substantial rehabilitation of ASEAN-5 banking system with the capital adequacy ratio (CAR) has been very high and far-reaching the minimum level of 8% required by the Basel 1 Accord It strongly indicates a cautious management within the banking system Nonetheless, the CAR ratio has not fully applied in Vietnam with the average capital ratio of about 6% in the period 2006-2008 However, commercial banks of Vietnam are going to face challenges as they must ensure the minimum CAR by 2010 under Vietnam’s commitments to the WTO
Table 3b: Rate of return on commercial bank equity (% per annum)
Source: CEIC; national sources; and Global Financial Stability Report, International Monetary Fund
Other comparisons between the soundness
of financial sector in ASEAN-5 and Vietnam
are shown in the stock market capitalization
Figure 5 suggests that at the time when the
stock market had not established in Vietnam
yet, the financial broadening process has
strongly fluctuated in ASEAN-5 and this period
also witnessed stock market capitalization
(turnover) decline as a result of the crisis, then
gradually recovered as the result of expanding
liberalization in financial sector and
improvement in management after the crisis In
Vietnam, despite the stock exchange market
was officially established in Ho Chi Minh City
in 2000, the existence of the stock market had
not been recognized until 2005 when it
suddenly skyrocketed in 2006 and 2007 in
terms of market capitalization (from 0.02% of GDP on average during 2000-2005 to about 27% of GDP in 2007) Besides, number of listed companies and investor’s accounts, participation of securities companies, and investment management funds were also booming at that time The corresponding trends are shown in Figure 6 Notably, the total value
of stock exchange market had been as one-fourth as that of ASEAN-5 only within three years from 2005 to about 2008
In sum, financial systems have contributed
to develop and grow in size as well as efficiency both in ASEAN-5 and Vietnam Financial deepening has been at a range between 60-80% of GDP in ASEAN-5 and a range between 18-36% in Vietnam Financial